Kudrin's Anti-Crisis Plan

Finance Minister Alexei Kudrin got a surprise gift on his recent
visit to Washington -- a subpoena. The paper was served to him on
April 24 as he entered the Peterson Institute for International
Economics to deliver a speech. RTVi television, which belongs to
former oligarch Vladimir Gusinsky, caught the action on film.

The subpoena came from U.S. law firms representing shareholders
of bankrupt Yukos. Later, Russian government sources said the U.S.
District Court for the District of Columbia had summoned Kudrin to
give evidence in the trial of former Yukos CEO Mikhail
Khodorkovsky. None of this seemed to fluster Kudrin, who proceeded
to deliver his Peterson Institute speech before an audience that
included former World Bank chief James Wolfensohn, financier George
Soros and scores of government experts and analysts.

Speaking of the global economy, Kudrin noted that the
International Monetary Fund and other economists now tout crisis
management practices, such as bailing out failing companies or
injecting liquidity, that raise a lot of questions. "IMF violates
recommendations they gave Russia in the early 1990s [not to bail
out or inject liquidity]," he observed with a dose of irony. "Now,
developed countries violate their own recommendations."

For now, Russia is sticking to conventional wisdom -- trying to
stimulate the economy by cutting corporate income tax from 24
percent to 20 percent and speeding up annual amortization rates
from 10 percent to 30 percent. Despite these measures, though,
credit in Russia continues to shrink, the financial sector has yet
to stabilize and currency reserves might not be adequate to weather
the crisis.

Kudrin characterized the rate of economic decline as worse than
expected. Gross domestic product contracted 9.5 percent in the
first quarter, rather than the expected 7.5 percent. Industrial
output fell by 14.3 percent, investment dropped by 15 percent and
construction declined by 19 percent.

Russia's bad-loan problem continues to grow. When international
methodology is used (counting all late loans as bad), Kudrin said
the amount of bad loans is 8 percent. If the banks reach the 10
percent mark, he said, the Finance Ministry would provide
additional credits to maintain liquidity. The Finance Ministry has
earmarked $28 billion for VTB and Sberbank.

The state will also double support for small businesses and cut
taxes for this sector by 50 percent. Overall, Kudrin said, the tax
burden will drop to 2 percent of GDP. But that may create some
tensions since the state also wants to increase pensions and
provide targeted support to automotive, aerospace and shipbuilding
sectors and export subsidies. With the budget revenues falling by
30 percent, the government may re-examine support of federal road
building, education and defense, he said.

Kudrin also explained what he meant when he said Russia may not
see the beneficial economic conditions of the last decade for
another 20 or 50 years. "I did not say, as some communist press
accused me, that the current crisis will last 50 years. ...
Instead, I focused on three factors: one, the highest oil prices in
history; two, the longest rise of oil prices; and three, the high
rate of growth of oil production in Russia of up to 10 percent a
year." These favorable circumstances may not return for many years,
he noted.

As for foreign policy, Kudrin said Russia demands that the
United States treat it as a peer in the global arena, presumably
disregarding its economic dire straits. The IMF talks on the new
supranational currency (international drawing rights) did not get
very far. "We already meet a cool attitude and even resistance [to
reform plans] of the international financial architecture that
would provide more power to developing economies such as Russia and
China."

Kudrin suggested that Russia was ready to invest some of its
$385 billion reserves in the IMF drawing rights. But, he noted,
Moscow needs reassurance that the drawing rights would be
sufficiently liquid.

It may take years before the IMF is ready to launch drawing
rights. Meanwhile, Kudrin will continue working to get Russia into
the World Trade Organization -- and to stay one step ahead of those
pesky court marshals.

Ariel
Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian
Studies and International Energy Security at the Allison Center of
the Katherine and Shelby Cullom Davis Institute at The Heritage
Foundation.